Investors have no clue how valuable Netflix (NFLX 1.71%) actually is. The streaming video giant started 2018 with a $90 billion market capitalization before soaring to $180 billion in early July, and then collapsing back below $100 billion. It then recovered slightly at end of the year to about $100 billion of value. Sure, it's a volatile, high-growth stock, but are the business fundamentals really changing that quickly?
Punctuating those dramatic stock price swings were earnings and subscriber growth misses -- in both directions -- but generally strong operating results through the first three quarters of 2018. On Thursday, Jan. 17, investors will find out how Netflix closed the fiscal year in a report that should clear up at least some of Wall Street's uncertainty about its business.
Let's take a closer look.
Image source: Getty Images.
Is growth still accelerating?
CEO Reed Hastings and his team predicted back in October that subscriber gains would land at 9.4 million in the fourth quarter to mark a big acceleration over the prior year's 8.3 million. More importantly, hitting that figure would ensure that membership gains reach 29 million for the full 2018 year compared to 24 million in 2017. It would also mean that Netflix has accelerated its user growth in each of the last five years.
That success implies plenty of room for additional global gains ahead, whether it's in underpenetrated international markets like India or in the U.S., where membership is still below the 60 million to 90 million range that executives targeted for the long term. Accelerating growth at that level can't continue forever, and Netflix's wins are attracting bigger, deeper-pocketed competition. But the fourth-quarter subscriber numbers, and Netflix's initial outlook for early 2019, should show investors whether another year of robust market-share gains is likely.
What are the economics behind hit movie releases?
Operating profit margin is expected to dive to 5% this quarter from 7.5% a year ago. Back in October, management said that this decline would be powered by a surge of original movie releases set for the fourth quarter. That's because costs around movie launches are accounted for differently than original series in that a bigger portion of their expenses are taken at release time.
We know the movie Bird Box was a big hit during the period, with 45 million members streaming the film in its first week of availability. That follows closely with Christmas Chronicles, which attracted a respectable 20 million views in its first week. Those viewership hours would be huge profit-generators if they represented theatrical ticket sales, but Netflix members didn't have to pay any more than their regular monthly fee for the content. Thus, look for executives to spend some time explaining why such high-production value film content is a worthwhile initiative for Netflix in terms of subscriber growth and/or user engagement and branding.
Is it "cash burn" or not?
Investors have focused on Netflix's negative cash flow over the last few years, but that metric will figure more prominently in this earnings report for two reasons. First, the company will issue an outlook for 2019 spending that's likely to approach $10 billion in content costs alone. And, with that outflow tilting toward original series and movies, the business' heavy cash requirements aren't likely to lessen.
NFLX Free Cash Flow (TTM) data by YCharts.
Second, Netflix just hired a new CFO, whose job will include minimizing that outflow and finding the best ways to bridge the gap between earnings and cash burn without saddling the company with too much expensive debt.
Ultimately, whether the bulls or bears feel more validated by the results, Thursday's announcement promises to be an entertaining earnings report from one of the fastest-growing businesses of the past five years.
Check out the latest Netflix earnings call transcript.
